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The rich-poor gap is getting worse under Trump

Middle-class families are doing a little bit better under President Trump. Jobs are plentiful in many places and incomes are finally starting to rise by more than inflation.

But income inequality in the United States is getting worse, and Trump’s policies have something to do with it, according to new research from Moody’s Investors Service, the bond-rating agency. While middle-income earners got a modest tax cut from last year’s Tax Cuts and Jobs Act, higher earners got a much larger windfall. And that comes as other forces have been widening the gap between the rich and the rest.

The result could be even more political upheaval than we’ve seen during the Trump reign, beginning, perhaps, with the midterm elections next month. “Should inequality go unaddressed,” the Moody’s report asserts, “social tensions will continue to rise, leading to a more fractious political landscape that increases political risk, and with it a less predictable policy environment.”

Top earners have been seeing the biggest income gains. Source: Moody’s

Income inequality became a hot topic following the Great Recession, starting with the Occupy Wall Street protests that spread nationwide in 2011. Thomas Piketty’s 2013 book, “Capital in the Twenty-First Century,” contained convincing quantitative evidence that the top 1% of earners — and above them, the 0.1% – have gained an ever-larger share of wealth in the western world during the last quarter-century.

Trump’s election in 2016 was itself an expression of frustration with stalled middle-class living standards, with Trump promising to “make America great again” for workers whose better days seemed behind them. About 40% of Trump voters were anti-elites or America-firsters, according to one detailed study, way more than enough to put him over the top.

But Trump’s policies seem more likely to widen the rich-poor gap than reduce it. Trump is trying to bring back manufacturing jobs, through tariffs on imports and other protectionist measures. But there’s no evidence yet that it’s happening, and economists are skeptical. Production may simply shift from tariffed countries, such as China, to un-tariffed ones, such as Vietnam. In the meanwhile, Trump’s tariffs threaten to raise prices on thousands of industrial and consumer products.

The tax cuts gave some relief to the middle class, and more is supposed to trickle down from the business sector as corporate tax cuts boost profits and leave more money for investing. But Moody’s doesn’t see that happening, because tax cuts were bigger for higher earners, who also benefit disproportionately from a reduction in the corporate tax rate from 35% to 21%.

“The Tax Cuts and Jobs Act will contribute to the widening of the U.S.’s inequality by exacerbating income and wealth concentration,” Moody’s concludes. “Overall, the tax reform disproportionately benefits households with high incomes and very high levels of wealth.”

Income inequality is worse in the United States than in most other developed nations, for a variety of reasons. Americans pay far more for education and health care, for instance, leaving less disposable income for middle earners. That’s because the government bears a larger share of such services in Europe and other places. The cost of a 4-year college degree is about 120% of average household income in the United States, for example. In Germany, it’s just 6%, because the government subsidizes post-secondary education.

Another factor enlarging the rich-poor gap is technological change, which benefits those with the resources to stay educated and learn new things, while punishing those dependent upon a fixed skill set. While Trump wants to bring back more lower-skill assembly-line jobs, he doesn’t have a policy for drawing more workers into the technology economy, which many labor advocates say is the best way to help raise living standards.

The more you earn, the more you’ll benefit from the Trump tax cuts. Source: Moody’s

Republicans seem surprised by the unpopularity of their tax cuts, which were designed in part to win votes by putting more money in people’s pockets. A middle-income taxpayer will save about $780 per year from the tax cuts, on average, according to the Tax Policy Center. But the average 1-percenter will save nearly $33,000, which helps explain why roughly 46% of Americans disapprove of the tax cuts. Just 41% approve.

Moody’s cares about income inequality because it factors into the creditworthiness of U.S. government bonds, which Moody’s currently rates Aaa, its highest level. But the rating agency sees risks. “Rising inequality will exacerbate pressures on the U.S.’s fiscal strength,” the agency says. The reasons: As lower-income households fall further behind, they’ll need more government support, straining federal budgets. Research also shows that higher income inequality tends to be associated with lower economic growth, which limits prosperity and depresses government tax revenue.

Don’t worry, they’ll be fine. Source: Getty Images

The federal deficit was $898 billion through the first 11 months of fiscal 2018, which ended in September. The deficit could easily top $1 trillion for the year, once the final tally is in. Last year, before the Trump tax cuts, the deficit was $667 billion. Overall, the national debt is about $21.6 trillion, which is more than the entire annual output of the U.S. economy.

That’s okay, for now, but Moody’s sees interest payments on U.S. debt rising from 8% of the federal budget now to 15% in a decade, which means there will be less money for government benefits. If current trends continue, a crunch is coming, with Uncle Sam either forced to slash benefits such as Social Security and Medicare, or raise taxes on the wealthy. As fractious as the Trump years have been so far, they might seem pleasant compared with what’s coming.